Fabrice Tourre leaves court during an afternoon break Monday, July 22, 2013 in New York. Tourre is a former Goldman Sachs trader accused of misleading other investors who lost a fortune by betting that investments would rise in value, while his fund bet against those same investments which were tied to high-risk mortgages. (AP Photo/Seth Wenig)

A key witness in the fraud trial of former Goldman Sachs trader Fabrice Tourre said Tuesday she believed hedge fund Paulson & Co Inc planned to invest in a 2007 mortgage deal at the center of the case, which is one of the biggest brought by the U.S. Securities and Exchange Commission over the events leading up to the financial crisis of 2008.

The testimony of Laura Schwartz, a former managing director at ACA Capital Holdings Inc, is central to the SEC's case that Tourre misled investors in the deal, known as Abacus 2007-AC1.

The Tourre case, which began last week in federal court in New York and is expected to last three weeks. Tourre is expected to testify Wednesday.

The SEC accuses Tourre of failing to tell investors that Paulson & Co intended to bet against Abacus. It also claims Tourre misled ACA into thinking Paulson was investing in the deal.

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According to the SEC, Paulson & Co came to Goldman Sachs looking for a way to bet against the subprime mortgage market. They came up with a $2 billion synthetic collateralized debt obligation tied to mortgage securities.

When Goldman brought on a subsidiary of bond insurer ACA to help select the mortgage securities underlying Abacus, Tourre allegedly misled ACA into believing Paulson intended to invest in the transaction.

Schwartz, who now works at the broker-dealer Seaport Group, was the main point of contact with Tourre and Paulson & Co, the SEC says.

"I believed Paulson would be the equity investor in the transaction," Schwartz told the court on Tuesday. She said her belief was based in part on discussions with people at Goldman and a document Tourre emailed her summing up the investment.

Goldman Sachs Group Inc, which was a defendant when the case was filed in 2010, settled for $550 million without admitting or denying the allegations.

Last week a former executive at Paulson & Co, Paolo Pellegrini, testified that he believed he told Schwartz over drinks in January 2007 at a conference in Jackson Hole, Wyoming, about Paulson's strategy of betting against the U.S. housing market before the Abacus transaction closed.

On Tuesday, Schwartz said she recalled the drinks meeting but said Pellegrini never told her Paulson was going to short Abacus.

ACA had never worked on a deal with a purely short investor, she said, adding it "would have been something very different for us."

Lawyers for Tourre have said they will question Schwartz's credibility by focusing on a recently concluded probe by the SEC of Schwartz's role in a different transaction.

Schwartz received a so-called Wells notice in February indicating that SEC was considering recommending a case against her over that transaction. Then, a week before Tourre's trial, Schwartz's lawyers notified the court that the SEC staff had decided against bringing a case against her.

On Monday, former ACA Chief Executive Alan Roseman told the court that ACA would have stopped the Abacus deal "in its tracks" if Paulson's real role had been known.